Rob Morrison Davis Neal David McKay Jon Marrs Team Paper Phase Three: An Industry Analysis We have chosen the sporting goods industry to analyze for this project. The top firms in the industry are Dicks, Cabelas, Hibbett, and Big 5. All of these companies bring different aspects to the sporting goods industry which makes them all very competitive. The sporting goods product mix includes outdoor equipment like snowboarding gear, skating gear, camping gear, hunting gear and fishing gear. They also have fitness equipment and a large line of athletic shoes. Their product mix also includes many other sports equipment and the even provide equipment for sporting teams. The target market segment for our strategic group are adults, generally between the ages of 25 and 44. According to the U.S. Bureau of the Census states that this market segment is the “fastest growing population bracket in the nation.” This creates a very positive outlook for the sporting good industry seeing as how their market base is growing at roughly 3.6 percent annually compared to the “general population growth of 1 percent in the nation.” We will first take a brief look at each company individually and how they perform in the industry and then look at the industry as a whole. We will also use porters five forces model to look at industry wide competition. Dick’s Sporting Goods Store Dick’s Sporting goods was founded in 1948 as Dick’s Clothing and Sporting Goods store. In 1999 it was renamed, Dick’s Sporting Goods inc. Dick’s specializes in sporting goods, sports apparel, and athletic footwear. They carry name brand merchandise such as North Face, Columbia, Under Armor and more. As of February 3, 2007 Dick’s owns 294 stores mostly on the eastern portion of the United States. Dick’s sporting goods is the industry leader in sales with $3.114 billion dollars in 2007. Dick’s Sporting Goods has had a slowly increasing profit margin over the past 3 years. In 2005 their gross profit margin was 27.8%. In 2006 that profit margin grew to 28.1%. Finally in 2007 that gross profit margin reached 28.8%. This is a fairly steady growth. Even though Dick’s is still expanding their business by increasing their store count each year, Dick’s seems to have a very steady increase in their profit margins. Compared to the industry average of 33.2%, Dick’s nevertheless has a smaller gross profit margin. Another important fact to consider is the inventory turnover ratio. This is a measure of how often Dick’s rotates their inventory per year. They seem to have a fairly steady inventory turnover at 2.9 times per year between 2005 and 2007. Compared to the industry average of 2.7 times per year, Dick’s has a slightly higher turnover ratio. Cabela’s Cabela’s Inc. is a sporting goods retail store with a focused low-cost leadership strategy. Cabela’s seeks to lure customers into their store by focusing upon hunting, fishing, camping and other outdoor related goods which appeal to their customer base. Rob Morrison Davis Neal David McKay Jon Marrs Rather than seeking to push into a broad low-cost sporting goods company and place the company in a new unknown market; the company steadily works to grow its market base by expanding into products the market base would purchase in addition to their more renowned items. This allows for the firm to add revenue and seek a stronger, greater market base, while staying true to their company history. The company has started offering a new service to customers shopping online: instant messaging customer service. This allows the customer to be aided while shopping for products online. The new service has been a boost to the number of customers who “abandoned” their shopping carts while shopping. Cabela’s also offers their knowledgeable staff to customers shopping online. This allows the customer to ask questions to the staff pertaining to their specific needs and customize their purchase. Cabela’s is able to answer most customer email on specific item on an average of 2.5 hours. This has allowed the company to cut cost relating to volumes of calls to the call center. The company is able to handle more customers by instant messaging and email than previously through the call center. Cabela’s has seen their gross profit margin increase slightly to 41%, well above the industry average. The Current Ratio was 1.5 and the Inventory Turnover was 2.46. Hibbett Hibbett Sports was founded in 1945 and was named Dixie supply company. In 1996 the name was changed to Hibbett Sporting Goods, Inc. Just last year they changed the name of the company once again to Hibbett Sports. The company is currently operating in 23 states and has over 620 stores. Hibbett, like most of the firms in the sporting goods industry, has chosen to locate it’s stores in malls and strip centers. This ensures a high flow of people and is congruent with the strategy of many other firms in the market. Hibbett is the third largest company in the industry and has a very positive outlook for the future. Hibbett has a price earnings ratio of 16.57 which shows that investors have a lot of confidence in the company and feel that its performance will be strong in the future compared with 7.7 for Big Five Sporting goods. Hibbett focuses on the small to mid-sized markets and plans to continue it’s rapid expansion. Hibbett also has a return on equity of 26.75 which significantly above the industry’s average and translates in to large returns for stockholders. (yahoofinance.com & U.S. department of finance) Big 5 Big 5 Sporting Goods was founded in 1955 in El Segundo, California. Big 5 Sporting Goods is one the largest sporting good stores in the United States. According to their website they have 363 stores in eleven states. They are primarily located on the west coast. Sixty percent of all their stores are located in California. Mainly their stores are about 11,000 square feet, which is about ¼ the size of their competitors, and usually in strip centers. They keep their stores small to provide lower operating costs, which can create lower prices for the costumers. (wikipedia) Rob Morrison Davis Neal David McKay Jon Marrs They are currently trying to become a more neighborhood associated company by provided exceptional customer information by contacting their local customers and updating them with any helpful information about the Big 5 Sporting Goods store near you. They also pride themselves on providing high-quality customer service by low cost high-quality products and great seasonal sales on product throughout the year. Big 5 Sporting Goods is around the same size of most of their competitors except Dicks is much larger than all of the corporations in their industry. They have a gross profit margin of 35.6 which is about average with the industry. Their current ratio is 9.28 and their operating profit margin is 8.5. (Answers.com) Industry The sporting goods industry has an average price earnings ratio of 26.8 for 2007, which means that investors have a lot of confidence in the industries outlook and earnings growth. Although all of our chosen companies are below the industry average it is important to note that all of our strategic group has a price earnings of 12 or above except for the Big 5 sporting group. This could signal that Big 5 will be growing fairly slowly over the next few years. The industry’s return on equity, is 12.1%, which is an average return for shareholders. Three of the companies in our strategic group are at least 10 percentage points above the industry average, which translates into big returns for stockholders. Cabelas is the exception in this industry falling just below the industries average with an 11.7% Return on Equity. Big 5 has the highest return on equity which might be a reason for their p/e ratio falling below the industries average. This might signal shareholders that Big 5 is at a peak and will begin growing much slower in the next few years. When we look at the Dividend Yield on common stock we see that most of our companies are expanding rapidly. We can see this because most of our strategic group has a Dividend yield of 0. This would signal that companies are choosing to reinvest in the company rather than pay dividends to shareholders. The only company, which does not follow the strategic group, is Big five which could be because they are moving towards slower growth. However, Big 5 currently pays a dividend yield of 3 percent, which is a typical dividend for most firms. This information gives a good insight into the sporting goods industry. All of the companies in our strategic group create a very interesting dynamic which will make the next phases of this project very informative. There are many key measures that help companies perform well in the sporting goods industry. When figuring the performance of the companies in the sporting goods industry you should compare certain industry ratios from multiple areas. These areas include profitability performance, liquidity performance, leverage performance and the performance of activities in the industry. For a company to be measured on performance in the sporting goods industry you should pay the most attention on inventory turnover ratio, gross margin ratio, quick ratio and long-term debt-to-equity ratio. Rob Morrison Davis Neal David McKay Jon Marrs Inventory turnover is important because it shows how many times per year a company goes trough their inventory. In the sporting goods store it is important for them to go through high inventory turnover because they are mostly selling inexpensive products so they need to sell many of these products throughout the year so they can create higher profits for their companies. If they cannot sell many products throughout the year then their inventory turnover ratio will be low and this shows they will have trouble selling their products. A company with a low inventory turnover should invest more in marketing and advertising to try to increase their turnover. The industry has a very good average inventory turnover ratio of 9.06 percent. This is good for the industry because it shows that they are active in selling and there are needs for the products that are provided by the sporting goods industry. Gross margin ratio is also very important when measuring the performance of companies in the sporting goods industry because it shows the profits that can pay for the company’s expenses. Companies want the gross margin ratio to be high because this shows that they are making profits that can cover their expenses and have money left over for profits. Sporting goods stores do not sell products that most people use on an every day basis so they will usually have a large inventory of products and when they have large gross margin then they can cover the cost of their large inventory. Having many different products means they usually will have high shipping cost because their products are coming form many different wholesalers so having a high gross margin is also important for covering these operating costs. The industry average for gross margin is 38.68 which is fairly impressive for an industry that provides many different product lines. Quick ratio is very important for every company in the sporting goods industry because most companies will have large inventories. These large inventories can become large debts if the company becomes in trouble by not turning over their products. The quick ratio will show if the company can pay current liabilities without relying on the sales of their inventory. The average quick ratio for the industry is .92 which is good because an industry wants the ratio to be low for the best results. If a company has a low quick ratio and they get into a very slow selling term than they will have a large amount of problems paying off their current liabilities. Finally, long-term debt-to-equity ratio is also important to companies in the sporting goods industry because it shows a companies ability to borrow money in the future because they have good balance between debt and equity in the company’s long- term capital structure. This is important because sports are everywhere and companies are looking to expand their company to new locations. The industry average for long- term dept-to-equity is .65 which is good for the industry. Corporations in the sporting goods industry will need to look to expand to stay competitive in their industry and they will need low long-term debt-to-equity ratios to get their funds. Rob Morrison Davis Neal David McKay Jon Marrs In terms of these performance factors Dick’s sporting goods is leading the industry. They have the best turnover ratios at 3.6 times per year. Compared to the industry average, Dick’s Sporting goods has one of the best averages. Big Five Sporting goods has one of the highest profit margins at 35.2%. Compared to the industry average Big Five is keeping a fairly substantial profit margin compared to their competitors. Big Five also has the highest quick ratio. This is because Big Five needs the additional cash in order to make their expansions possible. This is why the company is slightly more liquid at this time. In terms of debt to equity Dick’s has the lowest. They have a .23 ratio. This is mostly because the company has been around for longer than Big Five and Hibbett and also because they are the largest company in the industry with many financial backers. The external factors facing the company are growing. Many American’s still want to shop in store, yet as the internet becomes more readily available many people have found that getting products online can be cheaper and even shipped to their doorstep. These four companies have had to boost customer service in their stores in order to bring in more customers. Market share between these companies is quickly closing up. There is still plenty of room for profit, however these businesses need to be concerned about the locations of their stores across the nation relative to competitors. These companies also do not have much buying power over one another. Even though they each have significant buying power against smaller firms amongst each other these firms do not have a competitive advantage over one another. Finally, the costs associated with shipping products is rising creating higher overhead costs for the company forcing them to either sell more goods or raise prices. So far companies have been able to keep sales high, however they are predicting a rise in the prices of their goods due to inflation and higher overhead costs. The strategy for these companies is very uniform. Cabela’s and Dick’s both use best cost strategy to increase their market size and draw consumers to their store locations. Hibbett and Big 5 use broad differentiation to attract a wide range of consumers while being specific to many different sports. Strategic choices are aimed to attract consumers by service and knowledge of the sport or sports the consumer is interested. All four companies use the common theme of offering good service and knowledge of the sports they carry. This is encouraging for the consumer since the staffs in the stores are able to adequately explain the sport products or potential hazards faced while using the products or hazards. This builds a relationship with the store staffs and the consumer; for the company, this relationship building between the staff and consumer will hopefully return the consumer to the store in the future. The companies also attempt to have the best equipment and products available. By providing the best equipment to the consumer the companies build the trust of the consumer by providing the best equipment. The staff knowledge, of the sports which the Rob Morrison Davis Neal David McKay Jon Marrs consumers participate, is very important especially pertaining to first time buyers or new comers to the sport. The companies do differ slightly in the product selection of the stores. Cabela’s and Dick’s both attempt to find a fair price in relation to the quality goods provided to the consumers. Hibbett and Big 5 attempt to place themselves where even though the price may be higher the selection of products will have more depth. The companies do attempt some niche strategy while still pertaining to the everyday sports enthusiast. Cabela’s is particularly interested in the fishing and hunting consumer; however they do carry many other sport products. Dick’s and Big 5 both trend toward the team sports segment of consumers. Hibbett tends to focus upon the local team sports and team equipment. One of the most impressive niche strategies in this group is used by Hibbett. Hibbett’s marketing strategy focuses heavily upon the local team in smaller or mid-sized markets. Since Hibbett attempts to avoid clashing with a larger competitor such as Dick’s in a larger market, Hibbett builds their market size with smaller towns and local sports fans that are loyal to the local area team. This allows for Hibbett to provide a hometown atmosphere, while being a national chain with a significant revenue chain. In our strategic group diversification is of the upmost importance. In the sporting goods industry there are a wide array of products that must be sold and the more diverse the store is the more market share they will be able to achieve. However, sporting goods stores do have to be careful not to diversify too much. They need to diversify enough to make sure their customers have plenty to choose from but in the same respect if they diversify to much it is possible for the company to become disjointed. All of the sporting goods stores in our strategic group have a slightly different focus as a product base yet they also all cover a wide range of products to draw in new customers and maintain their current customer relations. Organization and execution also play a large roll in our sporting goods strategic group. Information sharing and organizational structure play a large part in the success of the companies in our strategic group. Take Cabelas for example. They have three very large sections to their company. If these three portions of the company are employing different strategies it would really stretch the company and push customers away. All of our companies do a very good job of employing the same strategy and through their organizational structure they work to make sure all of the segments of the company are performing under the same standards and communicating efficiently to make sure that their customers are satisfied every time they make an order from the stores catalog, visit the website, or get they full experience by visiting the store. These stores also move so much inventory and are so diversified that it is important for them to operate efficiently or they may end up with a surplus of inventory, or not have enough inventory, at anytime. Rob Morrison Davis Neal David McKay Jon Marrs The Sporting goods industry is very diverse and unique industry. They are a retail industry yet there are several different forms of sporting goods. Dick’s, Hibbett, Big Five and Cabela’s are each very unique to their region and to their customer base each grabbing a different corner of the market and each in very different locations in the United States. There is still plenty of room for these companies in the market for expansion. Each of these companies are in the process of expansion and it will be interesting to see what happens when the U.S. market becomes overcrowded.
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